FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2007
|_| Transition Report under Section 13 of 15(d) of the Securities Exchange Act
of 1934
For the transition period from _________ to ___________
Commission file number: 000-52639
ORIENT PAPER INC.
(Name of small business issuer in its charter)
Nevada 20-4158835
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Science Park, Xushui Town
Baoding City, Hebei Province,
People's Republic of China 072550
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Issuer's telephone number, including area code: 011 - (86) 312-8605508
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, par
value $0.001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes |X| No |_|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| (Do not check if a smaller reporting company)
Smaller reporting company |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes |_| No |X|
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter.
As of June 30, 2007, the aggregate market value of the common stock of the
registrant held by non-affiliates (excluding shares held by directors, officers
and other holding more than 5% of the outstanding shares of the class) was
less than $2,000,000, based upon the bid price of $0.50 as reported on the OTC
Bulletin Board at June 29, 2007.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15 of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court.
Yes |_| No |X|
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. As of March 24, 2008, the
registrant had outstanding 40,101,987 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE: None
2
Special Note Regarding Forward Looking Information
Orient Paper Inc. (referred to in this Transition Report on Form 10-K as
"we" or the "Company") desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. This report contains a
number of forward-looking statements that reflect management's current views and
expectations with respect to our business, strategies, future results and
events, and financial performance. All statements made in this annual report
other than statements of historical fact, including statements that address
operating performance, events or developments that management expects or
anticipates will or may occur in the future, including statements related to
future reserves, cash flows, revenues, profitability, adequacy of funds from
operations, statements expressing general optimism about future operating
results and non-historical information, are forward-looking statements. In
particular, the words "believe," "expect," "intend," " anticipate," "estimate,"
"may," "will," variations of such words and similar expressions identify
forward-looking statements, but are not the exclusive means of identifying such
statements and their absence does not mean that the statement is not
forward-looking. These forward-looking statements are subject to certain risks
and uncertainties, including those discussed below. Our actual results,
performance or achievements could differ materially from historical results as
well as those expressed in, anticipated or implied by these forward-looking
statements. We do not undertake any obligation to revise these forward-looking
statements to reflect any future events or circumstances.
Readers should not place undue reliance on forward-looking statements,
which are based on management's current expectations and projections about
future events, are not guarantees of future performance, are subject to risks,
uncertainties and assumptions (including those described below) and apply only
as of the date of this report. Our actual results, performance or achievements
could differ materially from the results expressed in, or implied by, these
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors"
below as well as those discussed elsewhere in this report, and the risks
discussed in our press releases and other communications to shareholders issued
by us from time to time, which attempt to advise interested parties of the risks
and factors that may affect our business. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise
PART I
Item 1. Description of Business.
Background
On October 29, 2007, the Company entered into an agreement and plan of
merger (the "Merger Agreement") with (i) its own wholly subsidiary, CARZ Merger
Sub, Inc., (ii) Dongfang Zhiye Holding Limited ("Dongfang Holding") and (iii)
each of Dongfang Holding shareholders (Zhenyong Liu, Xiaodong Liu, Chen Li, Ning
Liu, Jie Liu, Shenzhen Huayin Guaranty & Investment Company Limited, Top Good
International Limited, Total Giant Group Limited, Total Shine Group Limited,
Victory High Investment Limited, Think Big Trading Limited, Huge Step
Enterprises Limited, and Sure Believe Enterprise Limited) (the "Dongfang Holding
Shareholders"). Zhenyong Liu is the president and sole director of Dongfang
Holding.
3
The transaction described in the Merger Agreement is referred to as the
"Merger Transaction." A summary of the Merger Transaction, as well as the
material terms and conditions of the Merger Agreement, are set forth below, but
such summary is qualified in its entirety by the terms and conditions of the
Merger Agreement, a copy of which is filed as Exhibit 10.2 to the Company's
Current Report on Form 8-K filed on November 2, 2007.
Dongfang Holding is a holding corporation with no operations and was
formed on November 13, 2006 under the laws of the British Virgin Islands.
Dongfang Holding owns all of the issued and outstanding stock and ownership of
Hebei Baoding Orient Paper Milling Company Limited ("Hebei Paper"). Pursuant to
the Merger Agreement, Dongfang Holding merged with CARZ Merger Sub, Inc., with
Dongfang Holding as the surviving entity. As a result of the Merger Transaction,
Dongfang Holding became a wholly-owned subsidiary of the Company, which, in
turn, made the Company the indirect owner of Dongfang Holding's operating
company subsidiary, Hebei Paper.
Under the Merger Agreement, in exchange for their shares in Dongfang
Holding, the Dongfang Holding Shareholders received an aggregate of 29,801,987
newly-issued shares of the Company's common stock, $.001 par value, which shares
were distributed pro ratably among the Dongfang Holding Shareholders in
accordance with their respective ownership interests in Dongfang Holding.
Our Business
Hebei Paper, founded in 1996, engages mainly in production and
distribution of products such as copy paper, uncoated and coated paper, digital
photo paper, corrugated paper, plastic paper, kraft paper, graphic design paper,
antifraud thermal security paper, and other paper and packaging related
products. Hebei Paper uses recycled paper as its raw materials and has its
corporate offices in Baoding, People's Republic of China.
Hebei Paper's main products include various specifications of: (i)
corrugated paper, (ii) tea paperboard, (iii) middle-grade offset paper, (iv)
high-grade offset paper and (v) printing paper. Products currently in
development include (a) security paper, (b) environmental newsprint and (c)
digital photographic paper. With respect to each of these products, Hebei Paper
has already established process orders, installed production equipment and
completed small pilot production.
The supplies used in our production processes are comprised mainly of
readily available items for which there are multiple sources. Although we do not
anticipate difficulties in obtaining necessary supplies, ongoing inflationary
pressures could lead to an increase in our costs of raw materials and
production. Our main suppliers are Dongfang Business Company Limited, Beijing
Heerwang Industrial Material Company Limited, Shanghai Paper Machine Company
Limited-Beijing Branch, Tianhe Coal Company Limited, and AP Procurement Business
Company Limited-Macao Branch.
4
We generally sell our products to wholesalers and other distributors which
in turn resell our products to the ultimate end-users. Hebei Paper's main
customers are Beijing Zhongji Star Paper Company Limited, Shanghai Hengshi Paper
Company Limited, Hebei Mancheng Printing Company Limited, Beijing Star Paper
Company Limited and Baoding Hengyi Printing Company Limited.
Hebei Paper's main competitors are Nine Dragons Paper (Holdings) Limited;
Huatai Group Limited; Chenming Paper Group Limited; Sun Paper Group Limited; and
Qingshan Paper Co., Ltd. In addition to these competitors there are numerous
smaller family operations in the paper production industry. A number of our
competitors are larger entities with broader customer bases and greater
financial resources than those available to us.
Item 1A. Risk Factors.
You should consider carefully each of the following business and
investment risk factors and all of the other information in this report. If any
of the following risks and uncertainties develops into actual events, the
business, financial condition or results of our operations could be materially
and adversely affected. If that happens, the trading price of our shares of
common stock could decline significantly. The risk factors below contain
forward-looking statements regarding our business. Actual results could differ
materially from those set forth in the forward-looking statements. See "Special
Note Regarding Forward-Looking Information."
Risk Related to the Company's Business and Industry
Risk related to changes in customer order patterns.
Our financial condition can be adversely affected by changes in inventory
levels maintained by customers and the timing of customer purchases, which may
be affected by announced price changes, changes in our incentive programs, or
the customer's ability to achieve incentive goals. Changes in customers'
preferences for our products can also affect the demand for our products.
We are subject to fluctuations in costs of raw materials and energy, which could
materially and adversely affect our business.
As a manufacturer, our sales and profitability are also dependent upon the
cost and availability of raw materials and energy, which are subject to price
fluctuations, and the ability to control or pass on costs of raw materials and
labor. Inflationary and other increases in the costs of raw materials, labor and
energy have occurred in the past and are expected to recur, and our performance
depends in part on our ability to pass on to customers changes in costs in our
selling prices for products and on improvements in productivity. Also, there can
be no assurance that we will are able to obtain timely delivery of materials,
equipment, and packaging from suppliers. A disruption to our supply chain could
materially and adversely affect our sales and profitability.
5
We are dependent on a small number of customers for a significant portion of our
business.
Our customers are widely diversified, but in certain portions of our
business, industry concentration has increased the importance of certain
customers and decreased the number of customers for our products. In particular,
sales of consumer products in China are concentrated in a few major customers.
The business risk associated with this concentration, including increased credit
risks for these and other customers, and the possibility of related bad debt
write-offs, could materially and adversely affect our margins and profits.
There can be no assurance that we will timely develop or successfully market new
products, which are important to the growth of our business.
Our ability to develop and successfully market new products and
applications is important in maintaining growth. The timely introduction of new
products and improvements in current products helps determine our success.
Research and development for each of our operating segments is complex and
uncertain and requires innovation and anticipation of market trends. There can
be no assurance that our customers will continue to demand our current products,
that we will be able to develop new products on a cost effective basis, or that
if we do develop new products on a cost effective basis that our customers will
accept such new products.
Infringing intellectual property rights of third parties or inadequately
acquiring or protecting intellectual property and patents could harm our ability
to grow.
Because our products involve complex technology and chemistry, we are
sometimes involved in litigation involving patents and other intellectual
property. Parties have filed, and in the future may file, claims against us
alleging that we have infringed their intellectual property rights. We could be
held to be liable to pay damages or obtain licenses. There can be no assurance
that licenses will be available, or will be available on commercially reasonable
terms, and the cost to defend these infringement claims and to develop new
technology could be significant.
We also could have our intellectual property infringed. We attempt to
protect and restrict access to our intellectual property and proprietary
information, but it may be possible for a third party to obtain our information
and develop similar technologies. In addition, many of the regions in which we
operate have limited or no protection for intellectual property rights. The
costs involved to protect our intellectual property rights could materially and
adversely impact our profitability.
We face significant actual and potential competition for our products.
We compete in a highly developed market with companies that have
significantly greater experience and history in our industry. If we do not
compete effectively, we could lose market share and experience falling prices,
adversely affecting our financial results. Our competitors will expand in the
key markets and implement new technologies making them more competitive. There
is also the possibility that competitors will be able to offer additional
products, services, lower prices, or other incentives that we can not or will
not offer or that will make our products less profitable. There can be no
assurance that we will be able to compete successfully against current and
future competitors.
6
We face potential for litigation.
Potential adverse developments in legal proceedings and investigations
regarding competitive activities and other legal, compliance and regulatory
matters, including those involving product liabilities, product and trade
compliance, and other matters, could impact us materially. Our financial results
could be materially and adversely impacted by an unfavorable outcome to pending
or future litigation and investigations.
Risks related to environmental, health, and safety laws.
Due to the nature of the business, we are subject to environmental,
health, and safety laws and regulations, including those related to the disposal
of hazardous waste from our manufacturing processes. Compliance with existing
and future environmental, health and safety laws could subject us to future
costs or liabilities; impact our production capabilities; constrict our ability
to sell, expand or acquire facilities; and generally impact our financial
performance. We have accrued liabilities for environmental clean-up sites,
including sites for which governmental agencies have designated us as a
potentially responsible party, where it is probable that a loss will be incurred
and the cost or amount of loss can be reasonably estimated. However, because of
the uncertainties associated with environmental assessment and remediation
activities, future expense to remediate currently identified sites and other
sites, which could be identified in the future for cleanup, could be higher than
the liability currently accrued.
Our management is comprised almost entirely of individuals residing in the PRC
with very limited English skills.
Our management is comprised almost entirely of individuals born and raised
in the PRC. As a result of differences in culture, educational background and
business experiences, our management may analyze, evaluate and present business
opportunities and results of operations differently from the way they are
analyzed, evaluated and presented by management teams of public companies in
Europe and the United States. In addition, our management has very limited
skills in English. Consequently, it is possible that our management team will
emphasize or fail to emphasize aspects of our business that might customarily be
emphasized in a different manner by comparable public companies from different
geographical and political areas.
Our management is not familiar with the United States securities laws.
Our management and the former owners of the businesses we acquire are
generally unfamiliar with the requirements of the United States securities laws
and may not appreciate the need to devote the resources necessary to comply with
such laws. A failure to adequately respond to applicable securities laws could
lead to investigations by the Securities and Exchange Commission and other
regulatory authorities that could be costly, divert management's attention and
disrupt our business.
7
It may be difficult for our stockholders to enforce their rights as against the
Company or our officers or directors.
Because our principal assets are located outside of the United States and
our directors and executive officers reside outside of the United States, it may
be difficult for you to enforce your rights based on the United States Federal
securities laws against us and our officers and directors in the United States
or to enforce judgments of United States courts against us or them in the
People's Republic of China.
In addition, our operating subsidiaries and substantially all of our
assets are located outside of the United States. You will find it difficult to
enforce your legal rights based on the civil liability provisions of the United
States Federal securities laws against us in the courts of either the United
States or the People's Republic of China and, even if civil judgments are
obtained in courts of the United States, to enforce such judgments in the courts
of the People's Republic of China. In addition, it is unclear if extradition
treaties in effect between the United States and the People's Republic of China
would permit effective enforcement against us or our officers and directors of
criminal penalties, under the United States Federal securities laws or
otherwise.
Risks Related to Doing Business in China.
Adverse changes in economic and political policies of the People's
Republic of China government could have a material adverse effect on the overall
economic growth of China, which could adversely affect our business.
Because our operations are all located outside of the United States and
are subject to Chinese laws, any change of Chinese laws may adversely affect our
business.
All of our operations are outside the United States and are located in
China, which exposes it to risks, such as exchange controls and currency
restrictions, currency fluctuations and devaluations, changes in local economic
conditions, changes in Chinese laws and regulations, exposure to possible
expropriation or other Chinese government actions, and unsettled political
conditions. These factors may have a material adverse effect on our operations
or on our business, results of operations and financial condition.
China's economy differs from the economies of most developed countries in
many respects, including with respect to the amount of government involvement,
level of development, growth rate, control of foreign exchange and allocation of
resources. While the People's Republic of China economy has experienced
significant growth in the past 20 years, growth has been uneven across different
regions and among various economic sectors of China. The People's Republic of
China government has implemented various measures to encourage economic
development and guide the allocation of resources. Some of these measures
benefit the overall People's Republic of China economy, but may also have a
negative effect on us. For example, our financial condition and results of
operations may be adversely affected by government control over capital
investments or changes in tax regulations that are applicable to us. Since early
2004, the People's Republic of China government has implemented certain measures
to control the pace of economic growth. Such measures may cause a decrease in
the level of economic activity in China, which in turn could adversely affect
our results of operations and financial condition.
8
We face risks associated with currency exchange rate fluctuation, any adverse
fluctuation may adversely affect our operating margins.
Although the Company is incorporated in the United States, the majority of
our current revenues are in Chinese currency. Conducting business in currencies
other than US dollars subjects the Company to fluctuations in currency exchange
rates that could have a negative impact on our reported operating results.
Fluctuations in the value of the US dollar relative to other currencies impact
our revenue; cost of revenues and operating margins and result in foreign
currency translation gains and losses. Historically, the Company has not engaged
in exchange rate hedging activities. Although the Company may implement hedging
strategies to mitigate this risk, these strategies may not eliminate our
exposure to foreign exchange rate fluctuations and involve costs and risks of
their own, such as ongoing management time and expertise, external costs to
implement the strategy and potential accounting implications.
The Chinese legal and judicial system may negatively impact foreign investors.
In 1982, the National Peoples Congress amended the Constitution of China
to authorize foreign investment and guarantee the "lawful rights and interests"
of foreign investors in China. However, China's system of laws is not yet
comprehensive. The legal and judicial systems in China are still rudimentary,
and enforcement of existing laws is inconsistent. Many judges in China lack the
depth of legal training and experience that would be expected of a judge in a
more developed country. Because the Chinese judiciary is relatively
inexperienced in enforcing the laws that do exist, anticipation of judicial
decision-making is more uncertain than would be expected in a more developed
country. It may be impossible to obtain swift and equitable enforcement of laws
that do exist, or to obtain enforcement of the judgment of one court by a court
of another jurisdiction. China's legal system is based on written statutes; a
decision by one judge does not set a legal precedent that is required to be
followed by judges in other cases. In addition, the interpretation of Chinese
laws may be varied to reflect domestic political changes.
The promulgation of new laws, changes to existing laws and the pre-emption
of local regulations by national laws may adversely affect foreign investors.
However, the trend of legislation over the last 20 years has significantly
enhanced the protection of foreign investment and allowed for more control by
foreign parties of their investments in Chinese enterprises. There can be no
assurance that a change in leadership, social or political disruption, or
unforeseen circumstances affecting China's political, economic or social life,
will not affect the Chinese government's ability to continue to support and
pursue these reforms. Such a shift could have a material adverse effect on the
Company business and prospects.
The practical effect of the Peoples Republic of China legal system on the
Company business operations in China can be viewed from two separate but
intertwined considerations. First, as a matter of substantive law, the Foreign
Invested Enterprise laws provide significant protection from government
interference. In addition, these laws guarantee the full enjoyment of the
benefits of corporate Articles and contracts to Foreign Invested Enterprise
participants. These laws, however, do impose standards concerning corporate
9
formation and governance, which are not qualitatively different from the general
corporation laws of the several states. Similarly, the Peoples Republic of China
accounting laws mandate accounting practices, which are not consistent with U.S.
Generally Accepted Accounting Principles. China's accounting laws require that
an annual "statutory audit" be performed in accordance with Peoples Republic of
China accounting standards and that the books of account of Foreign Invested
Enterprises are maintained in accordance with Chinese accounting laws. Article
14 of the Peoples Republic of China Wholly Foreign-Owned Enterprise Law requires
a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and
statements to designate financial and tax authorities, at the risk of business
license revocation. Second, while the enforcement of substantive rights may
appear less clear than United States procedures, the Foreign Invested
Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered
companies, which enjoy the same status as other Chinese registered companies in
business-to-business dispute resolution. Generally, the Articles of Association
provide that all business disputes pertaining to Foreign Invested Enterprises
are to be resolved by the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award
rendered by this arbitration tribunal is, by the express terms of the respective
Articles of Association, enforceable in accordance with the "United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958)." Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.
Economic reform issues.
Although the Chinese government owns the majority of productive assets in
China, during the past several years the government has implemented economic
reform measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
o We will be able to capitalize on economic reforms;
o The Chinese government will continue its pursuit of economic reform
policies;
o The economic policies, even if pursued, will be successful;
o Economic policies will not be significantly altered from time to
time; and
o Business operations in China will not become subject to the risk of
nationalization.
Since 1979, the Chinese government has reformed its economic systems.
Because many reforms are unprecedented or experimental, they are expected to be
refined and improved. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within
China, could lead to further readjustment of the reform measures. This refining
and readjustment process may negatively affect the Company operations.
Over the last few years, China's economy has registered a high growth
rate. Recently, there have been indications that rates of inflation have
increased. In response, the Chinese government recently has taken measures to
10
curb this excessively expansive economy. These measures have included
devaluations of the Chinese currency, the Renminbi (RMB), restrictions on the
availability of domestic credit, reducing the purchasing capability of certain
of its customers, and limited re-centralization of the approval process for
purchases of some foreign products. These austerity measures alone may not
succeed in slowing down the economy's excessive expansion or control inflation,
and may result in severe dislocations in the Chinese economy. The Chinese
government may adopt additional measures to further combat inflation, including
the establishment of freezes or restraints on certain projects or markets.
To date, reforms to China's economic system have not adversely impacted
the Company operations and are not expected to adversely impact operations in
the foreseeable future; however, there can be no assurance that the reforms to
China's economic system will continue or that the Company will not be adversely
affected by changes in China's political, economic, and social conditions and by
changes in policies of the Chinese government, such as changes in laws and
regulations, measures which may be introduced to control inflation, changes in
the rate or method of taxation, imposition of additional restrictions on
currency conversion and remittance abroad, and reduction in tariff protection
and other import restrictions
Risks Related to the Company
We will continue to incur significant costs as a result of operating as a
public company, and management will be required to devote substantial time to
new compliance requirements.
As a public company the Company incurs significant legal, accounting and
other expenses under the Sarbanes-Oxley Act of 2002, together with rules
implemented by the Securities and Exchange Commission and applicable market
regulators. These rules impose various requirements on public companies,
including requiring certain corporate governance practices. Management and other
personnel will need to devote a substantial amount of time to these new
compliance requirements. Moreover, these rules and regulations will increase our
legal and financial compliance costs and will make some activities more
time-consuming and costly.
In addition, the Sarbanes-Oxley Act requires, among other things, that the
Company maintains effective internal controls for financial reporting and
disclosure controls and procedures. In particular, commencing in 2007, the
Company must perform system and process evaluations and testing of our internal
controls over financial reporting to allow management and our registered
independent public accounting firm to report on the effectiveness of our
internal controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. Our testing, or the subsequent testing by our registered
independent public accounting firm, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses.
Compliance with Section 404 may require that the Company incurs substantial
accounting expenses and expend significant management efforts. If the Company is
not able to comply with the requirements of Section 404 in a timely manner, or
if our registered independent accountants later identify deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline and the Company could be
subject to sanctions or investigations by the SEC or other applicable regulatory
authorities.
11
Risks Related to the Common Stock
There is a limited public market for the common stock.
There is currently a limited public market for our common stock and
ownership of our stock is concentrated in the hands of a limited number of
individuals. Our stockholders may, therefore, have difficulty selling their
common stock, should they decide to do so. In addition, there can be no
assurances that such markets will continue or that any shares of common stock,
which may be purchased, may be sold without incurring a loss. Any such market
price of the common stock may not necessarily bear any relationship to our book
value, assets, past operating results, financial condition or any other
established criteria of value, and may not be indicative of the market price for
the common stock in the future. Further, the market price for the common stock
may be volatile depending on a number of factors, including business
performance, industry dynamics, and news announcements or changes in general
economic conditions.
We have not paid and do not anticipate paying any dividends on our common
stock; therefore, our securities could face devaluation in the market.
We have paid no dividends on our common stock to date and it is not
anticipated that any dividends will be paid to holders of our common stock in
the foreseeable future. While our dividend policy will be based on the operating
results and capital needs of the business, it is anticipated that any earnings
will be retained to finance our future expansion and for the implementation of
our new business plan. Lack of a dividend can further affect the market value of
the Company's common stock, and could significantly affect the value of any
investment in the Company.
12
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Description of Property.
The assets of the Company and its subsidiary on a consolidated,
post-merger basis include cash and cash equivalents, accounts receivable from
customers, inventories, property and equipments. Hebei Paper headquarters are
located at Hebei Baoding Orient Paper Milling Company Limited, Science Park,
Xushui Town, Baoding City, Hebei Province, P.R. China. The headquarters, divided
into two districts, has a total area of 258.06 mu or approximately 42.50 acres.
Thye land is leased from the local government pursuant to a 30 year lease that
expires December 31, 2031. The lease requires an annual payment of $15,384. In
addition, the Company is obligated to return the land in its condition at the
commencement of the lease. The Company has not obtained an estimate for any
costs of restoration, but believes the costs to be accrued for 2006 and 2007 is
immaterial.
All the office buildings and factory buildings are built and owned by the
Company. As a result of the Merger, the corporate office of the Company will be
relocated to the above address. There are no present plans for the improvement
or development for our properties.
Item 3. Legal Proceedings.
The Company, its subsidiaries and its property are not a party to any
pending legal proceeding
Item 4. Submission of Matters to a Vote of Security Holders.
During the quarter ended November 30, 2007, the holder of a majority of
the outstanding common stock of the Company, acting by unanimous written consent
voted to amend the Company's Articles of Incorporation to change the name of the
Company to "Orient Paper Inc.," to increase the number of authorized shares of
the common stock of the Company to 500 million shares and to eliminate the
preemptive right of shareholders to acquire unissued shares of our common stock.
13
PART II
Item 5. Market for Company's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Our common stock, $.001 par value, is traded on the OTC Bulletin Board
under the symbol OPAI. Until late January of 2008, there was no active trading
in our common stock.
As of March 7, 2008, there were approximately seventeen holders of record
of our common stock.
No equity securities of our Company were purchased by us or any
"affiliated purchaser" of ours during the Transition Period from March 1, 2007
through December 31, 2007.
Dividends.
We have not declared or paid any cash dividends on our common stock since
our inception, and our board of directors currently intends to retain all
earnings for use in the business for the foreseeable future. Any future payment
of dividends will depend upon our results of operations, financial condition,
cash requirements and other factors deemed relevant by our board of directors.
There are currently no restrictions that limit our ability to declare cash
dividends on its common stock and we do not believe that there are any that are
likely to do so in the future.
Securities Authorized for Issuance Under Equity Compensation Plans.
We granted no options during the Transition Period. As of December 31,
2008, we had no equity compensation arrangements or plans either approved or not
approved by our stockholders.
Recent Sales of Unregistered Equity Securities.
Not applicable.
Item 6. Selected Financial Data.
Not applicable.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
Introduction
The section, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," is intended to facilitate the reader's understanding
of the Company's audited financial statements included in this Report. While
this report is being filed with respect to the ten-month transition period from
March 1, 2007 through December 31, 2007, the Company is including audited
financial statements restated for the entire calendar year ending December 31,
2007 (December 31 being the Company's new fiscal year end), rather than merely
the ten-month transition period. The information provided in this section should
be read together with the accompanying audited financial statements for such
period and the notes thereto.
Comparison of the fiscal years ended December 31, 2007 and 2006.
The following table and subsequent discussion presents certain
consolidated statement of operations information derived from the consolidated
statements of operations for the years ended December 31, 2007 and 2006 included
in this Transition Report on Form 10-Q.
Year ended Percentage
Dec. 31, 2007 Dec. 31, 2006 Change Change
----------------------------------------------------------------------------------------------
Revenues $39,707,431 $30,561,249 $9,146,182 29.93%
----------------------------------------------------------------------------------------------
Cost of Sales 33,098,875 25,230,151 $7,868,724 31.20%
----------------------------------------------------------------------------------------------
Gross Profit 6,608,556 5,331,098 $1,277,458 23.96%
----------------------------------------------------------------------------------------------
General and Administrative
Expense 273,941 292,833 ($18,892) -6.45%
----------------------------------------------------------------------------------------------
Income from Operations 6,334,615 5,038,265 $1,296,350 25.73%
----------------------------------------------------------------------------------------------
Other Income (Expense) (272,204) (279,243) $7,039 -2.52%
----------------------------------------------------------------------------------------------
Income before Income Taxes 6,062,411 4,759,022 $1,303,389 27.39%
----------------------------------------------------------------------------------------------
Income tax Expense 2,000,596 1,565,952 $434,644 27.76%
----------------------------------------------------------------------------------------------
Net Income 4,061,815 3,193,070 $868,745 27.21%
----------------------------------------------------------------------------------------------
Total Comprehensive Income 5,481,150 3,743,896 $1,737,254 46.40%
----------------------------------------------------------------------------------------------
Revenue
Revenue was $39,707,431 during the year ending December 31 2007, an
increase of $9,146,182 (or approximately 29.93%) from revenue of $30,561,249 for
the year ended December 31, 2006. The increase in revenue was attributable to
increasing demand for our products as a result of the closure of many small
paper milling companies because of heightened environmental laws and
regulations. In addition to the increased demand, we launched a successful
market expansion plan that increased the sales volume in domestic market.
Revenues also increased as a result of inflation which caused an increase in
unit prices. Further, the Chinese currency (Renminbi Yuan) has been appreciating
against the United States dollar, leading to an increase in revenues as reported
in US dollars.
15
Cost of Sales
Cost of sales was $33,098,875 during the year ending December 31 2007, an
increase of $7,868,724 (or approximately 31.2%) from cost of sales of
$25,230,151 for the year ended December 31, 2006. The increase in cost of sales
was attributable to the increase in our sales volume and an increase in the
price of raw materials year over year due to inflation
Gross Profit
Gross profit was $6,608,556 during the year ending December 31 2007, an
increase of $1,277,458 (or approximately 23.96%) from gross profit of $5,331,098
for the year ended December 31, 2006. The increase in gross profit was
attributable to our ability to increase prices in excess of our cost increases
as a result of increased demand.
General and Administrative Expenses
General and administrative expenses were $273,941 during the year ending
December 31 2007, a decrease of $18,892 (or approximately 6.45%) from general
and administrative expenses of $292,833 for the year ended December 31, 2006.
The decrease in general and administrative expenses was attributable to the
reduction in advertisement expenses occasioned by heightened market demand.
16
Income from Operations
Income from operations was $6,334,615 during the year ended December 31
2007, an increase of $1,296,350 (or approximately 25.73%) from income from
operations of $5,038,265 for the year ended December 31, 2006. The increase in
income from operations was attributable to the higher net sales generated and
the lower cost of sales and general and administrative expenses.
Other Income or Expense
Other expenses were $272,204 during the year ending December 31 2007, a
decrease of $7,039 (or approximately 2.52%) from other expenses of $279,243 for
the twelve months ended December 31, 2006. The decrease in other expenses was
attributable to a reduction in our outstanding debt.
Income before Income Taxes
Income before income taxes was $6,062,411 during the year ending December
31 2007, an increase of $1,303,389 (or approximately 27.39%) from income before
income taxes of $4,759,022 for the year ended December 31, 2006.
Income Tax Expense
Income tax expense was $2,000,596 during the year ending December 31 2007,
an increase of $434,644 (or approximately 27.76%) from income tax expense of
$1,565,952 for the year ended December 31, 2006. The increase in income tax
expense was attributable to the increase in our income before income taxes.
Net Income
Net income was $4,061,815 during the year ending December 31 2007, an
increase of $868,745 (or approximately 27.21%) from net income of $3,193,070 for
the twelve months ended December 31, 2006. The increase in net income was
attributable to the cumulative effect of the reasons discussed above.
Total Comprehensive Income
Total Comprehensive Income was $5,481,150 for the year ended December 31, 2007,
as a result of a foreign translation adjustment of $1,419,335. This represents
an increase of approximately 46% from total comprehensive income of $3,743,896
for the prior year. The increase reflects the Company's higher net income and
the fact that the foreign translation adjustment increased 157% from the
adjustment of $550,826 for the year ended December 31, 2006.
Liquidity and Capital Resources
As of December 31, 2007, we had cash and cash equivalents of $622,661. Cash
flows from operating activities were $7,731,727 for the twelve months ended
December 31, 2007, as compared to $7,861,997 for the twelve months ended
December 31, 2006. Cash flows used in investing activities were $3,272,572 for
the twelve months ended December 31, 2007, as compared to $15,365,801 for the
twelve months ended December 31, 2006. Cash flows used in financing activities
were $5,336,799 for the twelve months ended December 31, 2007, as compared to
$7,250,939 provided by financing activities for the twelve months ended December
31, 2006. We expect that our cash and cash equivalents will be sufficient to
satisfy our cash requirements for the next twelve months.
17
As of December 31, 2007, we had loans due to an officer in the amount of
$5,754,185. Advances from this officer to the Company have been as high as
$8,009,731 during the past two years and, absent such advances, we could not
have grown our business as we have done over the past two years. The obligations
to this officer do not bear interest and are due in installments of $2,530,368
and $3,223,817, on December 31, 2008 and 2009. If the Company does not have
sufficient liquidity to pay these loans when due, this officer could seek to
collect his loans, which would have a material adverse effect on the business of
the Company. .
On a long-term basis, our liquidity is dependent on successfully executing our
business plan, receipt of revenues, and additional infusions of capital through
equity and debt financing. Any funds raised from an offering of our equity or
debt will be used to continue to develop and execute our business plan. However,
there can be no assurance that we will be able to obtain additional equity or
debt financing on terms acceptable to us. We believe that the funds available to
us are adequate to meet our operating needs for internally generated market
expansion.
Off-Balance Sheet Arrangements
We have never entered into any off-balance sheet financing arrangements
and have never established any special purpose entities. We have not guaranteed
any debt or commitments of other entities or entered into any options on
non-financial assets. We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources that is material to any
investor in our securities.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The financial information required by this item is set forth beginning on
page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
Item 9A. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports under the Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission (the "SEC"), and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 15d-15(e) under the Exchange Act. In designing
and evaluating the disclosure controls and procedures, management recognized
18
that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
At the end of the period covered by this Report, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our Company's disclosure controls and procedures.
Based upon the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that, as of December 31, 2007, the disclosure controls and
procedures of our Company were effective to ensure that the information required
to be disclosed in our Exchange Act reports was recorded, processed, summarized
and reported on a timely basis.
We adopted the system of internal controls over financial reporting (as
defined in Rule 15d-15(f) of the Exchange Act) used by our operating subsidiary,
following the completion of the Merger Transaction on October 29, 2007. Under
the Merger Transaction, we acquired Dongfang Holding, then a privately held
company, and Hebei Paper, its operating subsidiary in China and also a privately
held company. Such financial controls were not designed to facilitate the
external financial reporting required of a publicly held company under the
Sarbanes-Oxley Act of 2002 and further, because Hebei Paper's accounting records
have historically been maintained using accounting principles generally accepted
in the People's Republic of China, its personnel may not be fully familiar with
accounting principles generally accepted in the United States of America.
Accordingly, to ensure the reliability of future financial reports our
management has determined to continue to augment the financial reporting system
inherited from Hebei Pper into a fully-integrated financial and operating
control system for our Company and its operations during the fiscal year ending
December 31, 2008, and, as necessary, to hire the requisite support to
facilitate the timely preparation of accurate financial reports.
This annual report does not include an attestation report of our
registered independent public accounting firm regarding internal control over
financial reporting. Our management's report was not subject to attestation by
our registered independent public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the company to provide only
our management's report in this annual report.
Item 9B. Other Information.
Not applicable.
PART III
Item 10. Directors and Executive Officers.
Our directors, executive officers and key employees are:
Name Age Position
---- --- --------
Zhenyong Liu 44 Chief Executive Officer and Director
Jing Hao 24 Chief Financial Officer
Dahong Zhou 28 Secretary
Xiaodong Liu 33 Director
Fuzeng Liu 58 Director
Chen Li 50 Director
19
The business experience of each or our directors, named executive officers
and significant employees is set forth below:
Zhenyong Liu. On November 30, 2007, Zhenyong Liu became a member of the
Board and was appointed Chairman of the Board. Mr. Liu has also served as the
Company's Chief Executive Officer since November 16, 2007. Mr. Liu also serves
as Chairman of Hebei Baoding Orient Paper Milling Company Limited, a position
held since 1996. Hebei Baoding Orient Paper Milling Company Limited is the
Chinese operating subsidiary of Dongfang Zhiye Holding Limited, which entity was
acquired by our Company under the merger transaction previously reported by the
Company in its Current Report on Form 8-K filed with the Commission on November
2, 2007. From 1990 to 1996, he served as Plant Director of Xinxin Paper Milling
Factory. Mr. Liu served as General Manager of Xushui Town Huandong electronic
appliances procurement station from 1986 to 1990 and as Vice Plant Director of
Liuzhuang Casting Factory from 1982 to 1986.
Jing Hao. Jing Hao was appointed as our Chief Financial Officer on
November 16, 2007. Ms. Hao also serves as Chief Financial Officer of Hebei
Baoding Orient Paper Milling Company Limited, a position she has held since
2006. Hebei Baoding Orient Paper Milling Company Limited is the Chinese
operating subsidiary of Dongfang Zhiye Holding Limited. From 2005 to 2006, she
served as Manager of Financial Department for Hebei Baoding Orient Paper Milling
Company Limited from 2005 to 2006 and as Assistant Manager of Financial
Department for Shandong Chenming Paper Milling Group Company Limited from 2004
to 2006.
Dahong Zhou. Dahong Zhou was appointed as our Secretary on November 16,
2007.Dahong Zhou also serves as Executive Manager of Hebei Baoding Orient Paper
Milling Company Limited, a position she has held since 2006. Hebei Baoding
Orient Paper Milling Company Limited is the Chinese operating subsidiary of
DZHL, which entity was acquired by our Company under the Merger Transaction
reported in our Current Report filed November 2, 2007.
Xiaodong Liu. On November 30, 2007, Xiaodong Liu became a member of the
Board. Mr. Liu also serves as General Manager of Hebei Baoding Orient Paper
Milling Company Limited, a position he has held since 2002. Hebei Baoding Orient
Paper Milling Company Limited is the Chinese operating subsidiary of Dongfang
Zhiye Holding Limited. He previously was at Hebei Baoding Orient Paper Milling
Company Limited from 2000 to 2002 and at Hebei Province Oil Investigation Design
Institute from 1998 to 2000.
Fuzeng Liu. On November 30, 2007, Fuzeng Liu became a member of the Board.
Mr. Liu also serves as Vice General Manager of Hebei Baoding Orient Paper
20
Milling Company Limited, a position he has held since 2002. Hebei Baoding Orient
Paper Milling Company Limited is the Chinese operating subsidiary of Dongfang
Zhiye Holding Limited. Previously, he was Deputy Secretary of Xushui Town
Traffic Bureau from 1992 to 2002, Party Secretary of Xushui Town Dayin Village
from 1988 to 1992, and Head of the Xushui Town Cuizhuang Village from 1984 to
1984. From 1977 to 1984, Mr. Liu served in committee office of Xushui Town. From
1970 to 1977, Mr. Liu served in the Pharmaceutical Company of Xushui Town.
Chen Li. On November 30, 2007, Chen Li became a member of the Board. Since
2005, Chen Li has also served as Deputy Secretary of the Bureau of Justice of
Xushui Town. Previously, he was Deputy Secretary of Bureau of Technical
Supervision of Xushui Town from 1994 to 2005, Head of the Office of Agricultural
Commission of Xushui Town from 1989 to 1994, and Vice Minister of the Armed
Forces of Xushui Town from 1985 to 1989. From 1979 to 1985, Mr. Li served in the
army of the Perople's Republic of China.
Director Compensation.
Directors of our Company are not compensated in cash for their services
but are reimbursed for out-of-pocket expenses incurred in furtherance of our
business.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers and beneficial owners of more than 10% of our
common stock to file with the SEC reports of their holdings of, and transactions
in, our common stock. Based solely upon our review of copies of such reports and
written representations from reporting persons that were provided to us, we
believe that our officers, directors and 10% stockholders complied with these
reporting requirements with respect to 2007.
Code of Ethics
We have not adopted a code of ethics to apply to our principal executive
officer, principal financial officer, principal accounting officer and
controller, or persons performing similar functions because, until recently, we
have not been an operating company. We expect to prepare a Code of Ethics in the
near future.
Committees
We do not currently have either an Audit Committee, Nominating Committee
or Compensation Committee. Our board of directors believes that our having no
committees during our the period covered by this Report was appropriate by
reason of (i) the nominal operations and nominal assets associated with our
prior status as a "shell company" and (ii) the lack of any requirements for such
committees under the regulations of the OTC Bulletin Board on which our common
stock is currently traded. However, with the completion of the Merger
Transaction in October 2007, we anticipate creating an audit committee, together
with such other committees as our board deems advisable.
21
Change in Control Arrangements
There are currently no arrangements that would result in a change in
control of our Company.
Item 11. Executive Compensation.
Our current and previous executive officers and directors do not receive
any compensation and have not received any restricted shares awards, options, or
any other payouts. As such, we have not included a Summary Compensation Table or
other tables pertaining to compensation or grants of options, stock or other
awards that otherwise would be included.
There are no current employment agreements between the Company and its
executive officer or director. Our executive officer and director have agreed to
work without remuneration until such time as we receive sufficient revenues
necessary to provide proper salaries to the officer and compensate the director
for participation.
There are no annuity, pension or retirement benefits proposed to be paid
to officers, directors or employees of the corporation in the event of
retirement at normal retirement date pursuant to any presently existing plan
provided or contributed to by Company.
The Company currently does not have employment agreements with its
executive officers. The executive officer/director of the Company has agreed to
take no salary until the Company can generate enough revenues to support
salaries on a regular basis. The officer will not be compensated for services
previously provided. They will receive no accrued remuneration.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
As of March 7, 2008, we had 40,101,987 shares of common stock outstanding.
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of that date by (i) each person who, to our
knowledge, beneficially owns more than 5% of our common stock; (ii) each of our
current directors and executive officers; and (iii) all of our current directors
and executive officers as a group:
Name and Address Amount and nature of Percent of
Title of class of Beneficial Owner (1) beneficial ownership (2) class (2)
-------------------------------------------------------------- -------------------------- -----------------
Common Stock Zhenyong Liu, 15,646,043 39%
Chief Executive Officer and Director
Common Stock Jing Hao, Chief Financial Officer 0 0%
Common Stock Xiaodong Liu, Director 1,102,674 2.7%
Common Stock Fuzeng Liu, Director 0 0%
Common Stock Chen Li, Director 804,654 2.0%
22
Name and Address Amount and nature of Percent of
Title of class of Beneficial Owner (1) beneficial ownership (2) class (2)
-------------------------------------------------------------- -------------------------- -----------------
Common Stock Executive Officers and Directors as a 17,553,371 43.77%
Group (3)
Common Stock Max Time Enterprises, Limited (4) 7,000,000 17.5%
Common Stock Hui Ping Chen (4) 7,000,000 17.5%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the fling date upon exercise of
warrants or options. Each beneficial owner's percentage ownership is determined
by assuming that options or warrants that are held by such person (but not those
held by any other person) and which are exercisable within 60 days from the
filing date have been exercised. The address for each beneficial owner is c/o
Orient Paper Inc., Science Park, Xushui Town Baoding City, Hebei Province,P.R.
China 072550.
(2) The percentages listed in the "Percent of Class" column are based upon
40,101,987 issued and outstanding shares of our common stock.
(3) Hui Ping Cheng, a former director of the Company, is the sole owner,
director and officer of Max Time Enterprise Limited and, by reason thereof, Ms.
Cheng may be deemed to be an indirect beneficial owner of 7,000,000 shares of
our Company's common stock held by Max Time Enterprise Limited.
(4) Consists of 5 individuals as of the filing date.
Item 13. Certain Relationships and Related Transactions.
Relationships and Related Transactions.
Except as otherwise disclosed herein or incorporated herein by reference,
in particular, with respect to the merger Transaction described in Item 1, there
have not been any transactions, or proposed transactions, during the last two
years, to which the Company was or is to be a party, in which any director or
executive officer of the Company, any nominee for election as a director, any
security holder owning beneficially more than five percent of the common stock
of the Company, or any member of the immediate family of the aforementioned
persons had or is to have a direct or indirect material interest.
Zhenyong Liu loaned to the Company $8,009,731 and $3,531,272 during the
years ended December 31, 2007, and 2006, respectively. As of December 31, 2007,
the Company owed Mr. Liu $5,754,185. There are provisions for deferring payment
if the Company's cash flow is not sufficient to cover the obligation. The loan
is non-interest bearing.
The obligation owed to the Chief Executive Officer matures as follows:
23
December 31, Amount
------------ -----------
2008 $ 2,530,368
2009 3,223,817
-----------
Total $ 5,754,185
===========
Director Independence.
The OTC Bulletin Board, on which our common stock is currently traded,
does not maintain director independence standards.
Item 14. Principal Accountant Fees and Services.
In connection with our change in control effective pursuant to a merger
transaction, as disclosed as disclosed on our Current Report on Form 8-K filed
on December 3, 2007, our Board of Directors approved the engagement of Davis
Accounting Group P.C. for all audit and permissible non-audit services, and
dismissed Moore & Associates, Chartered the Company's prior certifying
accountant, in each case effective as of November 27, 2007.
Our Board of Directors annually reviews the audit and permissible
non-audit services performed by our principal registered independent accounting
firm and reviews and approves the fees charged by our principal registered
independent accounting firm. Our Board of Directors has considered the role of
Davis Accounting Group P.C. in providing tax and audit services and other
permissible non-audit services to us and has concluded that the provision of
such services, if any, was compatible with the maintenance of such firm's
independence in the conduct of its auditing functions.
During fiscal years 2006 and 2007, the aggregate fees which we paid to or
were billed by Davis Accounting Group P.C. or Moore & Associates for
professional services were as follows:
Fiscal year ended December 31,
2007 2006
----------------- -----------------
Audit fees $32,500 $5,900
Audit-related fees 0 0
Tax fees 0 0
All other fees 0 0
As of February 29, 2008, we did not have a formal documented pre-approval
policy for the fees of our principal registered independent accounting firm.
24
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
INDEX TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
Report of Registered Independent Auditors - 2007............................ F-2
Report of Independent Registered Public Accounting Firm - 2006.............. F-3
Financial Statements-
Balance Sheets as of December 31, 2007, and 2006..........................F-4
Statements of Operations and Comprehensive Income for the Years
Ended December 31, 2007, and 2006...................................... F-5
Statements of Stockholders' Equity for the Years
Ended December 31, 2007, and 2006...................................... F-6
Statements of Cash Flows for the Years Ended December 31,
2007, and 2006......................................................... F-7
Notes to Financial Statements December 31, 2007, and 2006................ F-9
F-1
REPORT OF REGISTERED INDEPENDENT AUDITORS - 2007
To the Board of Directors and Stockholders of
Orient Paper, Inc.:
We have audited the accompanying balance sheet of Orient Paper, Inc. (a Nevada
corporation and formerly Carlateral, Inc.) as of December 31, 2007, and the
related statements of operations and comprehensive income, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orient Paper, Inc. as of
December 31, 2007, and the results of its operations and its cash flows for the
year ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.
Respectfully submitted,
/s/ Davis Accounting Group P.C.
Cedar City, Utah,
March 28, 2008.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - 2006
To the Board of Directors and Stockholders of
Orient Paper, Inc.:
We have audited the accompanying balance sheet of Orient Paper, Inc. (formerly
Hebei Baoding Orient Paper Milling Co., Ltd.) as of December 31, 2006, and the
related statements of operations and comprehensive income, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Hebei Baoding Orient Paper Milling Co., Ltd.'s management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company has determined that it
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Orient Paper, Inc. (formerly
Hebei Baoding Orient Paper Milling Co., Ltd.) as of December 31, 2006, and the
results of its operations and its cash flows for the year ended December 31,
2006, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Farber Hass Hurley LLP
(Formerly Farber Hass Hurley & McEwen LLP)
Granada Hills, California,
June 27, 2007, (except for the reverse merger event disclosed in Notes 1 and 6
to the financial statements, for which the date is October 29, 2007).
F-3
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
BALANCE SHEETS
AS OF DECEMBER 31, 2007, AND 2006
ASSETS
2007 2006
------------ ------------
Current Assets:
Cash and cash equivalents $ 622,661 $ 80,970
Accounts receivable-
Trade 1,111,157 1,625,862
Other 2,249 --
Less - Allowance for doubtful accounts -- --
Inventories 400,689 2,681,680
------------ ------------
Total current assets 2,136,756 4,388,512
------------ ------------
Property, Plant, and Equipment:
Building and improvements 9,230,313 8,629,172
Machinery and equipment 33,444,574 31,272,834
Vehicles 509,027 9,335
------------ ------------
43,183,914 39,911,341
Less - Accumulated depreciation and amortization (8,590,382) (5,637,180)
------------ ------------
Net property, plant, and equipment 34,593,532 34,274,161
------------ ------------
Total Assets $ 36,730,288 $ 38,662,673
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term loans payable $ 6,039,145 $ 5,356,939
Current portion of related party note 2,530,368 2,564,000
Accounts payable and accrued expenses 572,590 1,668,186
Taxes payable 851,279 1,832,419
------------ ------------
Total current liabilities 9,993,382 11,421,544
------------ ------------
Long-Term Debt, less current portion:
Related party note 3,223,817 9,209,190
------------ ------------
Total liabilities 13,217,199 20,630,734
------------ ------------
Commitments and Contingencies
Stockholders' Equity:
Common stock, 500,000,000 shares authorized, $0.001
par value per share, 40,101,987 shares issued
and outstanding in 2007 and 2006, respectively 40,102 40,102
Additional paid-in capital 9,070,117 9,070,117
Statutory earnings reserve 1,153,628 1,153,628
Accumulated other comprehensive income 2,291,187 871,852
Retained earnings 10,958,055 6,896,240
------------ ------------
Total stockholders' equity 23,513,089 18,031,939
------------ ------------
Total Liabilities and Stockholders' Equity $ 36,730,288 $ 38,662,673
============ ============
The accompanying notes to financial statements are
an integral part of these balance sheets.
F-4
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, AND 2006
Years Ended December 31,
-----------------------------
2007 2006
------------ ------------
Revenues:
Sales, net $ 39,707,431 $ 30,561,249
------------ ------------
Cost of Sales:
Cost of sales 32,939,286 25,106,423
Business tax and surcharges 159,589 123,728
------------ ------------
Total cost of sales 33,098,875 25,230,151
------------ ------------
Gross Profit 6,608,556 5,331,098
General and Administrative Expenses 273,941 292,833
------------ ------------
Income from Operations 6,334,615 5,038,265
------------ ------------
Other (Expense):
Interest expense (272,204) (275,225)
Non-operating expense -- (4,018)
------------ ------------
Total other (expense) (272,204) (279,243)
------------ ------------
Income before Income Taxes 6,062,411 4,759,022
Provision for Income Taxes (2,000,596) (1,565,952)
------------ ------------
Net Income 4,061,815 3,193,070
------------ ------------
Comprehensive Income:
Foreign currency translation adjustment 1,419,335 550,826
------------ ------------
Total Comprehensive Income $ 5,481,150 $ 3,743,896
============ ============
Earnings Per Share:
Basic and Diluted Earning per Share $ 0.10 $ 0.11
============ ============
Weighted Average Number of Shares
Outstanding - Basic and Diluted 40,101,987 30,181,165
============ ============
The accompanying notes to financial statements are
an integral part of these statements.
F-5
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007, AND 2006
Accumulated
Common stock Additional Statutory Other
---------------------- Paid-in Earnings Comprehensive Retained
Description Shares Amount Capital Reserve Income Earnings Totals
--------------------------- ---------- -------- ------------ ----------- ------------- ------------ ------------
Balance - December 31, 2005 29,801,987 $ 29,802 $ 9,048,828 $ 676,731 $ 321,026 $ 4,211,656 $ 14,288,043
Changes due to
recapitalization and
reverse merger 10,300,000 10,300 21,289 -- -- (31,589) --
Foreign currency
translation adjustment -- -- -- -- 550,826 -- 550,826
Allocation to Statutory
Earnings Reserve -- -- -- 476,897 -- (476,897) --
Net income for the period -- -- -- -- -- 3,193,070 3,193,070
---------- -------- ------------ ----------- ------------- ------------ ------------
Balance - December 31, 2006 40,101,987 $ 40,102 $ 9,070,117 $ 1,153,628 $ 871,852 $ 6,896,240 $ 18,031,939
---------- -------- ------------ ----------- ------------- ------------ ------------
Foreign currency
translation adjustment -- -- -- -- 1,419,335 -- 1,419,335
Net income for the period -- -- -- -- -- 4,061,815 4,061,815
---------- -------- ------------ ----------- ------------- ------------ ------------
Balance - December 31, 2007 40,101,987 $ 40,102 $ 9,070,117 $ 1,153,628 $ 2,291,187 $ 10,958,055 $ 23,513,089
========== ======== ============ =========== ============= ============ ============
The accompanying notes to financial statements are
an integral part of these statements.
F-6
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 2007, AND 2006
Years Ended December 31,
------------ ------------
2007 2006
------------ ------------
Cash Flows from Operating Activities:
Net income $ 4,061,815 $ 3,193,070
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 2,953,201 1,870,878
Changes in operating assets and liabilities:
Accounts receivable 512,456 (699,793)
Advances to suppliers -- 3,151,179
Inventories 2,280,991 423,639
Accounts payable and accrued expenses (1,095,596) 351,157
Advances from customers -- (876,331)
Taxes payable (981,140) 448,198
------------ ------------
Net Cash Provided by Operating Activities 7,731,727 7,861,997
------------ ------------
Cash Flows from Investing Activities:
Purchases of property, plant, and equipment (3,272,572) (15,365,801)
------------ ------------
Net Cash (Used in) Investing Activities (3,272,572) (15,365,801)
------------ ------------
Cash Flows from Financing Activities:
Proceeds from related party -- 8,009,731
Payments to related party (6,019,005) (2,246,269)
Proceeds from borrowing on credit facility 682,206 1,517,000
Loans on equipment and building -- 3,838,308
Payments on loans on equipment and building -- (3,867,831)
------------ ------------
Net Cash (Used in) Provided by Financing Activities (5,336,799) 7,250,939
------------ ------------
Effect of Exchange Rate Changes on Cash
and Cash Equivalents 1,419,335 5,814
------------ ------------
Net Increase (Decrease) in Cash
and Cash Equivalents $ 541,691 $ (247,051)
Cash and Cash Equivalents - Beginning of Period 80,970 328,021
------------ ------------
Cash and Cash Equivalents - End of Period $ 622,661 $ 80,970
============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 386,481 $ 301,411
============ ============
Cash paid for taxes $ 2,981,736 $ 1,087,934
============ ============
The accompanying notes to financial statements are
an integral part of these statements.
F-7
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 2007, AND 2006
Supplemental Disclosure of Cash Flow Information:
On October 29, 2007, the Company entered into an Agreement and Plan of Merger
between Orient Paper, CARZ Merger Sub, Inc., a Nevada corporation, and wholly
owned subsidiary of the Company, DZH Limited, and the stockholders of DZH
Limited. Under the terms of the Agreement and Plan of Merger, the Company issued
to the stockholders of DZH Limited 29,801,987 shares of the Company's common
stock, par value $.001, in exchange for all of the issued and outstanding shares
of stock of DZH Limited (50,000 shares).
The accompanying notes to financial statements are
an integral part of these statements.
F-8
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
(1) Summary of Significant Accounting Policies
Basis of Presentation and Organization
Orient Paper, Inc. ("Orient Paper" or the "Company" and formerly Carlateral,
Inc.) is a Nevada corporation that initially provided financing services
specializing in sub prime title loans, secured primarily using automobiles (but
also boats, recreational vehicles, machinery, and other equipment) as
collateral. The Company was incorporated under the laws of the State of Nevada
on December 9, 2005, under the name of Carlateral, Inc. The target market of the
Company was individuals needing short-term capital (30 to 90 days). Such
individuals generally were those individuals that either did not meet the
lending criteria of established banks and lending institutions, or did not wish
to incur the delays associated with a lengthy loan application and approval
process. The accompanying financial statements of Orient Paper were prepared
from the accounts of the Company under the accrual basis of accounting in United
States dollars. In addition, the accompanying financial statements reflect the
completion of a reverse merger between Orient Paper, CARZ Merger Sub, Inc., a
Nevada corporation and wholly owned subsidiary of the Company, Dongfang Zhiye
Holding Limited, a British Virgin Islands company ("DZH Limited"), and the
stockholders of DZH Limited, which was effected on October 29, 2007. DZH Limited
is a holding company with no operations, and owns 100 percent of the outstanding
stock and ownership of Hebei Baoding Orient Paper Milling Co., Ltd. ("HBOP"), a
company organized under the laws of the People's Republic of China ("PRC").
Prior to the completion of the reverse merger, Orient Paper was a corporation
with limited operations (since its incorporation on December 9, 2005). On
December 21, 2007, the name of the Company was changed from Carlateral, Inc. to
Orient Paper, Inc. in order to better reflect the current business plan
subsequent to the reverse merger.
DZH Limited was formed on November 13, 2006, under the laws of the British
Virgin Islands, and is a holding company. As such, DZH Limited does not generate
any financial or operating transactions. It owns 100 percent of the issued and
outstanding stock and ownership of HBOP.
HBOP was organized on March 3, 1996, under the laws of the PRC. HBOP engages
mainly in the production and distribution of products such as copy paper,
uncoated and coated paper, digital-photo paper, corrugated paper, plastic paper,
kraft paper, graphic-design paper, antifraud-thermal-security paper, and other
paper and packaging-related products. HBOP uses recycled paper as its raw
materials.
Given that DZH Limited is considered to have acquired Orient Paper by a reverse
merger through an Agreement and Plan of Merger (see Note 6), and its
stockholders currently have voting control of the Company, the accompanying
financial statements and related disclosures in the notes to financial
statements present the financial position as of December 31, 2007, and 2009, and
the operations for the years ended December 31, 2007, and 2006, of DZH Limited
and its subsidiary HBOP under the name of Orient Paper. The reverse merger has
been recorded as a recapitalization of the Company, with the consolidated net
assets of DZH Limited and its wholly owned operating subsidiary HBOP, and net
assets Orient Paper brought forward at their historical bases. The costs
associated with the reverse merger have been expensed as incurred.
F-9
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
Foreign Currency Translation
The Company accounts for foreign currency translation pursuant to SFAS No. 52,
"Foreign Currency Translation" ("SFAS No. 52"). The Company's functional
currency is the Chinese Yuan Renminbi ("CNY"). Under SFAS No. 52, all assets and
liabilities are translated into United States dollars using the current exchange
rate at the end of each fiscal period. Revenues and expenses are translated
using the average exchange rates prevailing throughout the respective periods.
Translation adjustments are included in other comprehensive income (loss) for
the period. Certain transactions of the Company are denominated in United States
dollars. Translation gains or losses related to such transactions are recognized
for each reporting period in the related statement of operations and
comprehensive income (loss).
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of December 31, 2007, and revenues and expenses for the years
ended December 31, 2007, and 2006. Actual results could differ from those
estimates made by management.
Risks and Uncertainties
The Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates, and operating in the
PRC under its various laws and restrictions.
Cash and Cash Equivalents
For purposes of reporting within the statements of cash flows, the Company
considers all cash on hand, cash accounts not subject to withdrawal restrictions
or penalties, and all highly liquid debt instruments purchased with a maturity
of three months or less to be cash and cash equivalents.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash. The Company places its temporary cash
investments in reputable financial institutions which are fully insured by the
PRC government.
Accounts Receivable
Trade accounts receivable are recorded on shipment of products to customers, and
generally are due under the terms of net 30 days. The trade receivables are not
collateralized and interest is not accrued on past due accounts. Periodically,
management reviews the adequacy of its provision for doubtful accounts based on
historical bad debt expense results and current economic conditions using
factors based on the aging of its accounts receivable. Additionally, the Company
F-10
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
may identify additional allowance requirements based on indications that a
specific customer may be experiencing financial difficulties. Actual bad debt
results could differ materially from these estimates. As of December 31, 2007,
management determined that a reserve for bad debts was not needed. While
management uses the best information available upon which to base estimates,
future adjustments to the allowance may be necessary if economic conditions
differ substantially from the assumptions used for the purposes of analysis.
Inventories
Inventories consist principally of raw materials (used paper) and finished goods
and are stated at the lower of cost (first-in, first-out method) or market.
Property and Equipment
Property and equipment are stated at cost. Major renewals, betterments, and
improvements are charged to the asset accounts while replacements, maintenance,
and repairs, which do not improve or extend the lives of the respective assets,
are expensed to operations. At the time property and equipment are retired or
otherwise disposed of, the asset and related accumulated depreciation accounts
are relieved of the applicable amounts. Gains or losses from retirements or
sales are credited or charged to income.
The Company depreciates property and equipment using the straight-line method as
follows:
Building and interior 30 years
Furniture and fixtures 5-15 years
Vehicles 15 years
Long-Lived Assets
The Company evaluates the recoverability of long-lived assets and the related
estimated remaining useful lives when events or circumstances lead management to
believe that the carrying value of an asset may not be recoverable and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. In such circumstances, those assets are written
down to estimated fair value. For the years ended December 31, 2007, and 2006,
no events or circumstances occurred for which an evaluation of the
recoverability of long-lived asset was required.
Fair Value of Financial Instruments
The Company estimates the fair value of financial instruments using the
available market information and valuation methods. Considerable judgment is
required in estimating fair value. Accordingly, the estimates of fair value may
not be indicative of the amounts the Company could realize in a current market
exchange. As of December 31, 2007, and 2006, the Company's financial instruments
approximated fair value to do the nature and maturity of such instruments.
F-11
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
Statutory Reserves
The laws and regulations of the PRC require that before an enterprise
distributes profits to its shareholders, it must first satisfy all tax
liabilities, provide for losses in previous years, and make allocations, in
proportions determined at the discretion of the Board of Directors, after the
statutory reserve. The statutory reserves include a surplus reserve fund and a
common welfare fund. These statutory reserves represent restricted retained
earnings.
Surplus Reserve Fund
The Company is required to transfer 10 percent of its net income, as determined
in accordance with the PRC accounting rules and regulations, to a statutory
surplus reserve fund until such reserve balance reaches 50 percent of the
Company's registered capital.
The transfer to this reserve must be made before distribution of any dividend to
shareholders. For years ended December 31, 2007, and 2006, the Company
transferred approximately $0 and $318,000, respectively, to this reserve. The
surplus reserve fund is non-distributable other than during liquidation and can
be used to fund previous years' losses, if any, and may be utilized for business
expansion or converted into share capital by issuing new shares to existing
shareholders in proportion to their shareholdings or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issue is not less than 25 percent of the registered capital.
Common Welfare Fund
The Company is required to transfer 5 percent to 10 percent of its net income,
as determined in accordance with the PRC accounting rules and regulations, to
the statutory common welfare fund. This fund can only be utilized on capital
items for the collective benefit of the Company's employees, such as
construction of dormitories, cafeteria facilities, and other staff welfare
facilities. This fund is non-distributable other than upon liquidation. The
transfer to this fund must be made before distribution of any dividend to
shareholders.
Revenue Recognition Policy
The Company recognizes revenue when goods are shipped, when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist, and collectability is reasonably
assured. The Company is required to collect a three percent value-added-tax
("VAT") on each sale. Gross revenues do not include this VAT which is remitted
to the government quarterly.
Advertising
The Company expenses all advertising and promotion costs as incurred.
Advertising and promotion costs for the years ended December 31, 2007, and 2006,
were $198 and $1,168, respectively.
F-12
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
Lease Obligations
All noncancellable leases with an initial term greater than one year are
categorized as either capital or operating leases. Assets recorded under capital
leases are amortized according to the same methods employed for property and
equipment or over the term of the related lease, if shorter.
Income Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax assets and
liabilities are determined based on temporary differences between the bases of
certain assets and liabilities for income tax and financial reporting purposes.
The deferred tax assets and liabilities are classified according to the
financial statement classification of the assets and liabilities generating the
differences.
The Company maintains a valuation allowance with respect to deferred tax assets.
The Company establishes a valuation allowance based upon the potential
likelihood of realizing the deferred tax asset and taking into consideration the
Company's financial position and results of operations for the current period.
Future realization of the deferred tax benefit depends on the existence of
sufficient taxable income within the carryforward period under the Federal tax
laws.
Changes in circumstances, such as the Company generating taxable income, could
cause a change in judgment about the realizability of the related deferred tax
asset. Any change in the valuation allowance will be included in income in the
year of the change in estimate.
Foreign operations of the Company are governed by the Income Tax Laws of the
PRC. Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax ("EIT") is
at a statutory rate of 33 percent, which is comprised of 30 percent national
income tax and three percent local income tax.
Comprehensive Income (Loss)
The Company presents comprehensive income (loss) in accordance with Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 states that all items that are required to be recognized
under accounting standards as components of comprehensive income (loss) be
reported in the financial statements. For the years ended December 31, 2007, and
2006, the only components of comprehensive income were the net income for the
periods, and the foreign currency translation adjustments.
Earnings Per Common Share
Basic earnings per share is computed by dividing the net income attributable to
the common stockholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share is computed similar to
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares had been issued and if the additional common shares were
dilutive.
F-13
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
Fiscal Year End
On November 16, 2007, the Board of Directors of the Company elected under the
Bylaws of the Company to change the fiscal year end from February 28th to
December 31st. Because of the reverse merger completed by the Company on October
29, 2007, the financial statements as of December 31, 2007, and 2006, and for
the years then ended are presented on the basis of the year end of DZH Limited
and HBOP.
Reclassification
Certain 2006 amounts have been reclassified to conform with the 2007
presentation.
(2) Inventories
Inventories consisted of the following as of December 31, 2007, and 2006:
2007 2006
---------- ----------
Raw materials $ 182,752 $1,403,066
Finished goods 217,937 1,278,614
---------- ----------
Total inventories $ 400,689 $2,681,680
========== ==========
(3) Short-term Loans Payable
The Company had the following short-term loans payable as of December 31, 2007,
and 2006:
2007 2006
------------------------
Note payable, secured by equipment, payable at maturity, including
interest at 7.8% per annum. Renewable annually $1,911,174 $1,787,108
Credit facility payable, secured by building, payable at maturity,
including interest at 2% plus the Bank's reference interest rate.
Renewable annually 1,302,450 1,517,000
Note payable, secured by equipment, payable at maturity, including
interest at 6.7% per annum. Renewable annually 822,600 1,283,631
Note payable, secured by equipment, payable at maturity, including
floating interest per annum. Renewable annually 2,002,921 769,200
------------------------
Total short-term loans payable $6,039,145 $5,356,939
========================
As of December 31, 2007, the Company's credit facility had a maximum borrowing
level of $2,000,000, which left $0 in borrowing capacity. The average short-term
borrowing rate for the year was approximately 7.9 percent.
F-14
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
(4) Commitments and Contingencies
Operating Lease
The Company leases 133,200 metric acres of land at its location from a local
government through a real estate lease with a 30-year term and expires on
December 31, 2031. The lease requires an annual rental payment of approximately
$15,384. This operating lease is renewable at the end of the 30-year term.
Future minimum lease payments are as follows:
December 31, Amount
------------ ----------
2008 $ 15,384
2009 15,384
2010 15,384
2011 15,384
2012 15,384
Thereafter 292,296
----------
Total lease payments $ 369,216
==========
Environmental Remediation
In accordance with the real estate lease, the Company will be obligated to
return the land to its condition prior to the lease. As such, the Company will
accrue the cost estimated to return the land to its prior condition over the
30-year life of the lease. The Company has not obtained an estimate for those
costs, but management is confident that any such costs that should be accrued in
the years ended December 31, 2007, or 2006, are not material.
(5) Related Party Transactions
The Chief Executive Officer of the Company loaned to the Company $8,009,731 and
$3,531,272 during the years ended December 31, 2007, and 2006, respectively. As
of December 31, 2007, the Company owed the Chief Executive Officer $5,754,185.
There are provisions for deferring payment if the Company's cash flow is not
sufficient to cover the obligation. The loan is non-interest bearing.
The obligation owed to the Chief Executive Officer matures as follows:
December 31, Amount
------------ ----------
2008 $2,530,368
2009 3,223,817
----------
Total $5,754,185
==========
F-15
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
(6) Common Stock
On December 16, 2006, the Company issued 7,000,000 shares of its common stock
for proceeds of $7,000.
On December 24, 2006, the Company issued 3,300,000 shares of its common stock
for proceeds of $16,500.
On October 29, 2007, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") between Orient Paper, CARZ Merger Sub, Inc., a Nevada
corporation, and wholly owned subsidiary of the Company, DZH Limited, and the
stockholders of DZH Limited. Under the terms of the Merger Agreement, the
Company issued to the stockholders of DZH Limited 29,801,987 shares of the
Company's common stock, par value $0.001, in exchange for all of the issued and
outstanding shares of stock of DZH Limited (50,000 shares). The shares of common
stock of the Company were issued without registration under the Securities Act
of 1933, and were distributed pro rata among the stockholders of DZH Limited in
accordance with their respective ownership interests in DZH Limited immediately
before completion of the merger transaction. As a result of the Merger
Agreement, DZH Limited merged with CARZ Merger Sub, Inc., with DZH Limited as
the surviving entity. As such, DZH Limited became a wholly owned subsidiary of
the Company, which, in turn, made the Company the indirect owner of DZH
Limited's operating subsidiary, HBOP.
For financial reporting purposes, DZH Limited is considered to have acquired
Orient Paper by a reverse merger through the Merger Agreement, and its
stockholders currently have voting control of the Company. As such, the
accompanying financial statements and related disclosures in the notes to
financial statements present the financial position as of December 31, 2007, and
the operations for the years ended December 31, 2007, and 2006, of DZH Limited
and its subsidiary HBOP under the name of Orient Paper. The reverse merger has
been recorded as a recapitalization of the Company, with the consolidated net
assets of DZH Limited and its wholly owned operating subsidiary HBOP, and net
assets Orient Paper brought forward at their historical bases. The costs
associated with the reverse merger have been expensed as incurred.
On December 21, 2007, by a majority vote of the stockholders of the Company, the
amount of authorized common stock, par value $0.001 per share, was increased
from 75,000,000 shares to 500,000,000 shares. In addition, the Company
eliminated preemptive rights to acquire unissued shares of its common stock.
(7) Income Taxes
The provision for income taxes for the periods ended December 31, 2007, and
2006, was as follows (assuming a 33% effective tax rate):
2007 2006
---------- ----------
Current Tax Provision:
National and local- $2,000,596 $1,565,952
---------- ----------
Total current tax provision $2,000,596 $1,565,952
========== ==========
F-16
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
(8) Change in the Board of Directors and Management
Effective November 16, 2007, each of the following individuals were appointed by
the Board of Directors of the Company to serve until his or her successor is
chosen or upon his or her earlier resignation or removal as an officer of the
Company in accordance with the Bylaws of the Company: Zhenyong Liu, Chief
Executive Officer; Jing Hao, Chief Financial Officer; and, Dahong Zhou,
Secretary.
Effective November 30, 2007, Hui Ping Cheng resigned in her capacity as the sole
member of the Board of Directors of the Company. Effective the same date,
Zhenyong Liu, Xiaodong Liu, Fuzeng Liu, and Chen Li were appointed to the Board
of Directors to serve until his or her successor is chosen or upon his or her
earlier death, resignation, or removal as a member of the Board of Directors in
accordance with the Bylaws of the Company. Zhenyong Liu was also appointed as
Chairman of the Board of Directors of the Company.
(9) Recent Accounting Pronouncements
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including An Amendment of FASB
Statement No. 115" ("SFAS No. 159"), which permits entities to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. An entity would report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The decision about whether to elect the fair value option is applied
instrument by instrument, with a few exceptions; the decision is irrevocable;
and it is applied only to entire instruments and not to portions of instruments.
SFAS No. 159 requires disclosures that facilitate comparisons (a) between
entities that choose different measurement attributes for similar assets and
liabilities and (b) between assets and liabilities in the financial statements
of an entity that selects different measurement attributes for similar assets
and liabilities. SFAS No. 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year, provided the entity also elects to apply the
provisions of SFAS No. 157. Upon implementation, an entity shall report the
effect of the first re-measurement to fair value as a cumulative-effect
adjustment to the opening balance of retained earnings. Since the provisions of
SFAS No. 159 are applied prospectively, any potential impact will depend on the
instruments selected for fair value measurement at the time of implementation.
The management of the Company does not believe that this new pronouncement will
have a material impact on its financial statements.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations -
Revised 2007" ("SFAS No. 141R"), which replaces FASB Statement No. 141,
"Business Combinations." SFAS No. 141R establishes principles and requirements
intending to improve the relevance, representational faithfulness, and
comparability of information that a reporting entity provides in its financial
reports about a business combination and its effects. This is accomplished
through requiring the acquirer to recognize assets acquired and liabilities
assumed arising from contractual contingencies as of the acquisition date,
measured at their acquisition-date fair values. This includes contractual
F-17
ORIENT PAPER, INC.
(FORMERLY CARLATERAL, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2007, AND 2006
contingencies only if it is more likely than not that they meet the definition
of an asset of a liability in FASB Concepts Statement No. 6, "Elements of
Financial Statements - a replacement of FASB Concepts Statement No. 3." This
statement also requires the acquirer to recognize goodwill as of the acquisition
date, measured as a residual. However, this statement improves the way in which
an acquirer's obligations to make payments conditioned on the outcome of future
events are recognized and measured, which in turn improves the measure of
goodwill. This statement also defines a bargain purchase as a business
combination in which the total acquisition-date fair value of the consideration
transferred plus any noncontrolling interest in the acquiree, and it requires
the acquirer to recognize that excess in earnings as a gain attributable to the
acquirer. This, therefore, improves the representational faithfulness and
completeness of the information provided about both the acquirer's earnings
during the period in which it makes a bargain purchase and the measures of the
assets acquired in the bargain purchase. The Company does not expect the
adoption of this pronouncement to have a material impact on its financial
statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51" ("SFAS No.
160"). SFAS No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent's equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS No. 160
clarifies that changes in a parent's ownership interest in a subsidiary that do
not result in deconsolidation are equity transactions if the parent retains its
controlling financial interest. In addition, this statement requires that a
parent recognize a gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. SFAS No. 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest.
SFAS No. 160 is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. Earlier adoption is
prohibited. The management of the Company does not expect the adoption of this
pronouncement to have a material impact on its financial statements.
In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about
Derivative Instruments and Hedging Activities - an Amendment of FASB Statement
133" ("SFAS No. 161"). SFAS No. 161 enhances required disclosures regarding
derivatives and hedging activities, including enhanced disclosures regarding
how: (a) an entity uses derivative instruments; (b) derivative instruments and
related hedged items are accounted for under FASB No. 133, "Accounting for
Derivative Instruments and Hedging Activities"; and (c) derivative instruments
and related hedged items affect an entity's financial position, financial
performance, and cash flows. Specifically, FASB No. 161 requires:
o Disclosure of the objectives for using derivative instruments be disclosed
in terms of underlying risk and accounting designation;
o Disclosure of the fair values of derivative instruments and their gains
and losses in a tabular format;
o Disclosure of information about credit-risk-related contingent features;
and
o Cross-reference from the derivative footnote to other footnotes in which
derivative-related information is disclosed.
FASB No. 161 is effective for fiscal years and interim periods beginning after
November 15, 2008. Earlier application is encouraged. The management of the
Company does not expect the adoption of this pronouncement to have a material
impact on its financial statements.
F-18
PART IV
Item 15. Exhibits.
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive
Officer
32.2 Certification pursuant to 18 U.S.C. 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial
Officer
25
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ORIENT PAPER INC.
Date: April 15, 2008 By: /s/ Zhenyong Liu
-------------------------------------
Zhenyong Liu, Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Date
--------- ----
/s/ Zhenyong Liu
----------------------------------------------------- April 15, 2008
Zhenyong Liu, Chief Executive Officer
(principal executive officer), Chairman, and Director
/s/ Jing Hao
----------------------------------------------------- April 15, 2008
Jing Hao, Chief Financial Officer
(principal financial and accounting officer)
/s/ Dahong Zhou
----------------------------------------------------- April 15, 2008
Dahong Zhou, Secretary
/s/ Xiaodong Liu
----------------------------------------------------- April 15, 2008
Xiaodong Liu, Director
/s/ Fuzeng Liu
----------------------------------------------------- April 15, 2008
Fuzeng Liu, Director
/s/ Chen Li
----------------------------------------------------- April 15, 2008
Chen Li, Director
26
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C. 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive
Officer
32.2 Certification pursuant to 18 U.S.C. 1350, adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial
Officer
27